Tether: the stablecoin that suddenly feels unstable

November 19, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 19th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Could a single cryptocurrency cause the entire market to crash? Despite fresh all-time highs, the crypto world may be starting to wobble as Tether — a so-called stablecoin — has suddenly begun to feel unstable.

A bit player from the 1990s movie “The Mighty Ducks”. A former Italian plastic surgeon. And one of the people who came up with the cartoon TV series “Inspector Gadget”.

Together, this rather improbable trio is associated with a secretive company that administers $69 billion – more than SEK 600 billion – and keeps the entire crypto economy running. The only question is whether the money is actually still there.

The project is called Tether and is what’s known as a “stablecoin”. Unlike cryptocurrencies such as bitcoin and ether, whose prices are constantly in motion, stablecoins are meant to function as a digital substitute for ordinary currency. One (1) Tether is supposed to be backed by one (1) US dollar. You exchange your money for stablecoins, then use them to speculate and invest quickly.

The advantage of using stablecoins is that transactions are faster, cheaper – and that you can sidestep laws around tax and money laundering far more easily. Ordinary banks are hard to use for this kind of activity, since their rules and regulations often make it too risky for them to provide the services. In the shadow of that, a parallel world of crypto liquidity grows. Stablecoins become the lubricant of the entire economy, and therefore a central piece of the ecosystem.

But a stablecoin only works as long as the underlying currency is still there – that is, as long as you can swap your Tether back for dollars. And for some time, questions have been raised about whether all the money at Tether Limited actually exists – and if so, where it is. Most recently in a long Bloomberg Businessweek feature.

The journey takes them from Taiwan, via China and the French Riviera. The trail eventually leads to Deltec Bank & Trust, with offices in Nassau in the Bahamas. The bank confirms in the article that a quarter of the money sits with them, but answers cryptically that they have no knowledge of the remaining 75 percent. Where the rest of the money is remains unknown. And because Tether Limited is not registered as a bank but as an ordinary company, it does not have to disclose that information either.

This is no small actor surrounded by question marks. The amount of capital Tether Limited handles would make it one of the 50 largest banks in the United States.

The question of where the money sits is principally important because trading cryptocurrency through stablecoins is hugely popular. Over 50 percent of all bitcoin transactions are currently done with Tether, according to data firm Kaiko. On top of that, a published study from 2018 showed that an account at Bitfinex – a crypto exchange whose owners also control Tether Limited – bought bitcoin with newly issued Tether every time the bitcoin price fell, propping up the price. Plenty may have happened since then, but it is also in the nature of these transactions that they are hard to identify. There is therefore a concern that Tether is primarily an instrument for keeping the bitcoin price up for its investors.

If Tether Limited does not have full backing for its currency, a bank run could happen. That’s when everyone wants their money out at the same time and the cash isn’t enough to go around. It can happen for several reasons – bad investments, theft. In such a scenario, the owners would keep any upside, while all the losses fall on the customers. In a noted New York ruling in which Bitfinex and Tether Limited were sued, their own lawyers admitted that they had only 74 percent backing on deposited capital. The companies were banned from operating in New York and had to pay $18.5 million in fines for misleading their customers and overstating their reserves.

So how does this keep going? And how can crypto traders continue to trust that Tether Limited is legitimate? The short answer seems to be that Tether is needed for the speculation to keep going. Sam Bankman-Fried, a 29-year-old crypto billionaire, told Bloomberg that “if you’re a crypto company, banks get nervous about working with you”. So it is hard to run investing and speculation without an intermediary that can facilitate your trades. And since ordinary banks have laws and rules to follow, they often can’t help. Tether Limited, on the other hand, can. Tether is, in other words, the fuel that keeps a very large part of crypto trading going. And the upside of that trading is judged to outweigh the risk that Tether Limited might go insolvent.

That, at least, is the short-term reasoning. The question is what happens if – or when – this fuel suddenly runs out.

Rivian: second only to Tesla — and only 56 cars built

November 15, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 15th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Fewer than a hundred cars have rolled out of the factory — yet Rivian has left auto giants like Ford and Daimler far behind in market value. The explanation is a perfect mix of Tesla, the fear of missing the next stock-market boom, and a strong tailwind on climate.

When a company goes public, it has to list the risks it sees ahead. Rarely has a company been summed up as well as in a single sentence from its own risk list:

“We are a company with an extremely limited operating history that has not generated material sales of our vehicles or other products and services.”

The company in question is Rivian, which went public on the Nasdaq last week.

The American company Rivian sells electric vehicles – or rather, intends to sell electric vehicles. When it disclosed how many cars had rolled out of its factory through the end of October, the number was 56.

Every company has to start somewhere, of course. Toyota sold just over half a million vehicles last quarter, but its history goes back to 1933. Rivian is only twelve years old. There’s still time to ramp up production.

What’s striking isn’t how few Rivian cars are on the road – it’s how the company is valued. As of writing, Rivian has a market cap of around $127 billion – higher than giants like Daimler ($108 billion), Ford Motors ($78 billion) and GM ($92 billion). After Tesla ($1,038 billion), Rivian is now the second most valuable carmaker in the United States.

It’s a stretch, you might think. To make sense of this, you have to start by looking at the company at the very top of the podium.

Elon Musk’s big bet on Tesla has had EV enthusiasts cheering, and the established carmakers sweating. But the happiest of all are probably the shareholders. Over the past five years, the share price has gone up nearly 2,700 percent.

The price action has raised many questions, even from unexpected quarters. Last year, Musk himself tweeted concerns that the company might be overvalued. The stock was at $151 then. Today it trades for over $1,000.

Both funds and retail investors probably wish they had bought Tesla earlier – and perhaps that’s exactly the feeling Rivian is riding on today. Its promises and ambitions look like Tesla’s. Could that create the expectation of a similar share-price trajectory, especially for anyone who missed Tesla the first time around? Not impossible. Seen this way, the stock can almost be viewed as decoupled from the underlying business. It can be more about expected price action than whether the company will grow into a fair valuation over time.

Another variable is the strong macro factors around the climate. Gasoline prices are heading up, and battery capacity for EVs is too. At the same time, big (and somewhat airy) promises came out of the COP26 climate summit on the energy transition.

When market value drifts that far from the business itself, it can easily put the focus on the wrong thing.

That electric vehicles will play a big role in the future of transport is an uncontroversial idea. The real question is who manages to produce them best. Is it the traditional automakers electrifying existing production lines – or is it better to start from scratch and shed the legacy dependencies? A similar comparison can be made between Volvo Cars and Polestar, even though they sit inside the same group.

Rivian is a bet on the latter approach, where you start from zero. But even there, competition is coming from several new directions. Apple’s much-discussed “Project Titan”, for example, is an effort focused on electric and self-driving cars, even if nothing has reached the market yet.

That there is a tailwind for EV companies, including Rivian, is beyond doubt. Official filings suggest 55,400 pre-orders. And maybe more interesting still – Rivian has a high-profile prospective customer and shareholder: Amazon. The retail giant owns 22 percent of Rivian and has previously placed an order for 100,000 vehicles. But the question is whether that tailwind might end up tipping the boat over rather than helping it along. The risk is at least significant.

When market value drifts that far from the business itself, it can easily put the focus on the wrong thing. And right now, Rivian needs to spend 100 percent of its attention on doing one thing: making cars.

The metaverse: the trend no one can afford to miss

November 12, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in metaverse-nya-trenden-ingen-har-rad-att-missa”>SvD Näringsliv, in Swedish, on November 12th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The future for many tech companies is suddenly spelled “metaverse”. But when the vision of a 3D world doesn’t fit, the companies quickly find a way to ride the wave — without changing their strategy.

The year was 2011. Google was about to launch its new social network, Google+. Expectations were sky-high, and Vic Gundotra – then one of the company’s most senior tech executives – did nothing to lower them.

“Sharing on the internet is awkward. Even broken. And we plan to fix it.”

Against the backdrop of Facebook’s recent success, every tech giant wanted to get on board with what was then called “Web 2.0”, or the social web. The term, coined by author and internet legend Tim O’Reilly a few years earlier, referred to letting users participate in and create content on the internet. At the time, Instagram had only existed for a year and TikTok hadn’t been born even as a thought. Still – the trend was too strong for Google to ignore.

But letting users share information and content with each other turned out to be harder than it first looked. Google+ became one of the search giant’s largest and most public failures, and was shut down in 2019 after a long, slow decline. The social web didn’t fit Google’s strengths as a company.

Trends like this come to Silicon Valley at regular intervals. Concepts and ideas everyone has to engage with – and show off some footwork around. CEOs are forced to explain their strategy both to the market and to their employees.

The trend on everyone’s lips today is the metaverse. Facebook has renamed its parent company to Meta, and recently companies like Epic Games, Microsoft, Roblox and Tencent have all made statements about how they fit into – and help build – this new digital universe. This summer, an exchange-traded fund even launched in the US that invests only in metaverse-related companies.

Does this mean the world’s biggest tech companies are about to collide as they all aim for the same target? Possibly when it comes to the semantics. Because it is easier to appropriate a new and hyped term than to actually rework your company’s strategy to fit a new world. When Microsoft describes an animated 3D world inside its communications platform Teams where you can talk to your colleagues, it’s similar enough on the surface to be called a metaverse. But an animated chat on a corporate intranet is not what the trend is really about.

The Canadian analyst Matthew Ball, a co-founder of the fund mentioned above, has written the most influential pieces on the subject. He describes the metaverse as an “interoperable network of 3D virtual worlds rendered in real time”. The key word is the slightly clunky “interoperable”, which means several systems work together. So no single company owns the metaverse — it works much like the internet itself. You can link back and forth, and it is accessible to – and to some extent belongs to – everyone. You can describe it as a new kind of internet world in 3D where you can work, play and socialize.

In practice, there are a number of large American companies that account for a very large share of all internet usage and want to position themselves around the metaverse. The names are familiar – Google, Facebook, Apple, Amazon and Netflix. Their interest in painting a vision around this new trend is therefore entirely understandable. We will see a race in which everyone wants to be associated with the metaverse – but from different starting points and with different visions.

Expect, then, more statements like the one from Drew Houston, CEO of Dropbox, who said last week that “we’re building toward a metaverse. I’m very excited about that vision.” So we are talking about a file server that syncs documents, which is now also going to store digital files in the metaverse. Apple’s much-discussed new mixed-reality glasses are expected to launch soon. They will likely be positioned as a way into the metaverse. Niantic – the maker of the popular Pokémon Go – just released its platform for what it calls the “real-world metaverse”. Google, which recently stopped supporting its own VR effort Daydream, will almost certainly find a new way to fit in here too.

Don’t mistake all of these statements for a shared, unified vision of the future. VR, AR and 3D worlds being just around the corner is nothing new. Apple launched its animated 3D emojis – animojis – back in 2017. The tech companies will keep doing their own thing, but they have now found a new and popular wrapper to put around it.

So what comes of all this? It will probably end up being a new internet universe of some kind – but for some companies, their bets will turn out more like another Google+ and the emperor’s new clothes.

Mark Zuckerberg is at least going big. Facebook is investing SEK 85 billion in its metaverse – this year alone. But Zuckerberg also has a major pivot to make. Analyst Brent Thill argues that Snap – with its AR filters, bitmojis and 3D maps – is far ahead of Facebook on the metaverse, without ever having used the term (yet). Maybe you don’t need the hyped terminology to win in this new world after all.

Zillow’s algorithmic home-buying is a flop

November 8, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 8th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Using algorithms, the American real-estate giant Zillow was going to buy homes and add $20 billion to annual revenue. Instead, the project is now being shut down and thousands of people laid off — all because the software miscalculated.

“Good afternoon, everyone. We appreciate you joining us today.”

It sounds friendly, but it was probably mostly something he had to say. Rich Barton, CEO of Zillow, sounded tired and deflated when he delivered the bad news on his earnings call last week.

The company, which can be described as an American Hemnet, announced that it is winding down its Zillow Offers division, taking a $569 million write-down (about SEK 4.8 billion) and laying off nearly 25 percent of staff. After riding high on the wave of rising US home prices, the share fell hard – more than 30 percent in just a few days. How could this have gone so wrong?

The phenomenon is called “iBuying”, short for “instant buying”. The term was coined by an equity analyst in 2017 to describe a new type of company in the housing market. Services like Opendoor and Offerpad offered a fast and easy way to sell the most expensive – and often hardest to sell – asset most people own: their home.

iBuyers develop algorithms that compute what a home is worth and produce an offer within minutes after the seller has filled in some basic information. Accept the offer and the sale can close within a few days. The business model is built on cutting out the broker, and the companies therefore buy the homes at a discount compared with what a bidding war could have produced. Once you subtract broker fees and account for the speed, the idea is that the offer is roughly equivalent.

The model exists in Sweden too. The company Movesta recently raised SEK 85 million in venture capital, and in an interview with SvD Näringsliv in March, Micha Lindqvist, one of its founders, said they receive hundreds of applications a week.

It sounds easy and clever. But as Zillow has just learned, the model has its limits. As anyone who has moved between cities knows, the housing markets within a country can vary dramatically. Zillow had therefore focused on certain regions and tuned its systems to perform well precisely in the areas it served. But as with so much else, a company’s algorithms are only as good as the way they’re programmed.

In this case, Zillow had pushed its bids up just as the housing market was starting to cool. Suddenly the company was sitting on 7,000 homes that wouldn’t sell, and had to offer them to institutional investors instead. “I think they relied on home price appreciation at exactly the wrong time”, as analyst Ed Yruma told Bloomberg.

There are two ways to read the failure.

You can see it as an example of a disruptive company that promises the moon but ultimately can’t deliver. We’ve seen it many times before – from the infamous American e-commerce company Pets.com to the Swedish group-buying service Letsbuyit. Companies that present a compelling vision of the future but in the end can’t live up to it. Maybe not because the vision itself was wrong, but because the timing or the execution didn’t make it the whole way. Selling homes without a broker is a radical change. But maybe brokers offer something the algorithms still can’t.

The other way to read Zillow’s failure is that big companies have a hard time pivoting their business model. Opendoor, one of the first iBuyers, spent all its time getting the pricing and selection right – it picked a niche, a single track, and aimed to be the best at it. Zillow – the American Hemnet, as noted – already dominated in the US with many other services when it decided to add iBuying to the mix. But it’s hard to retool around innovative business models, especially when it’s only one of many things you’re doing. The smaller companies’ speed and focus can sometimes tip the scales, even with fewer resources.

Is this then the end of iBuying as a phenomenon? The stock market doesn’t seem to think so. Competitor Opendoor’s share price did fall when the first news about Zillow trickled out. But once it became clear that Zillow was giving up on iBuying – Opendoor rose 19 percent.

Big Tech hides the numbers — to keep luring new creators

November 1, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on November 1st, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Influencer. Streamer. Podcaster. Jobs in what is now called the creator economy. But new numbers show that the chance of breaking through is, to put it mildly, slim. The platforms are doing nothing to change it.

In February 2004, Chris Anderson, then editor-in-chief of Wired magazine, stepped onto what was at the time the most influential stage in the world – the TED conference in Monterey, California.

Against a wine-red and purple backdrop, Anderson presented his thoughts on how to predict tech trends. In the talk, he didn’t yet name the concept that would later lay the foundation for a new kind of economy: “the long tail”.

The thesis is simple. As the supply of both products and internet users grows, you can find new markets in the niches. Many obscure books, taken together, can sell more than a single bestseller – provided there are enough obscure books and enough buyers.

Finding your own niche of followers in the world is also what underpins what’s now called the creator economy. Being an influencer, streamer or podcaster – sometimes all three at once – is a job centered on producing content and entertainment for an audience.

It sounds great. But in the creator economy, the long tail is starting to look more and more like a long “hockey stick” with very few winners.

When the Amazon-owned streaming service Twitch was hacked earlier in October, the data on how revenue is distributed became public. So far this year, 1 percent of all streamers have taken in more than 50 percent of the revenue, according to a Wall Street Journal analysis. Three quarters of everyone who earned anything at all on the site brought in less than $120, around SEK 1,000.

The same pattern can be found across other parts of the creator economy.

Data compiled by the news site Axios shows that 1 percent of podcasters take the overwhelming majority of all advertising revenue. In the fast-growing market for newsletters, the ten biggest collectively bring in more than $20 million in subscription revenue, while the majority of the newsletters reviewed make tens of thousands of dollars per year (often considerably less). Numbers from 2019 show that 1 percent of all apps account for 80 percent of all downloads, and 93 percent of all revenue.

So why does this pattern keep repeating? Is the top 1 percent that much better than everyone else on their respective platforms? It’s part of the explanation. But by the theory of the long tail, there should also be room for many more people to actually earn a living.

That leads us to look at how the marketplaces themselves work.

When Apple and Google halved their app-store fees for developers earning under $1 million a year, it was framed as a concession to the political pressure they had been under. But a closer look showed that cutting from 30 to 15 percent would, in practice, make little difference. The lost revenue for Apple and Google amounted to less than 5 percent.

For the platform companies – Apple, Google, Amazon – the distribution of revenue between developers does not matter. They make the same money regardless of how it’s split. They do, however, have a clear incentive to project a sunshine view of how much money there is to be made, because that is what brings in new content. Apple often talks about how much money they have paid out to developers in total – but they never mention what the median developer can expect to earn.

A tactical move, of course. Showing the median, while at the same time luring in new content creators who dream of big money, doesn’t add up.

Why Trump’s social network will flop

October 21, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 21st, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Banned from the world’s biggest social media platforms — Donald Trump is now starting his own and taking it straight to the stock market. It is set up to fail. The only value Trump will manage to generate is fresh PR for an emerging election campaign.

“Account suspended” is what you see if you visit twitter.com/realdonaldtrump – once one of the most popular Twitter accounts in the world.

In the wake of the storming of the Capitol, the former president was kicked off, almost in unison, every tech company’s platform. Trump was instead reduced to issuing his many pronouncements via press release. The most recent one from this summer – a tribute to an American football coach – is just 25 words long. A tweet without Twitter, in other words.

Now Trump appears to have grown tired of speaking without an audience. In a newly formed media company – Trump Media and Technology Group – he is going straight to the stock market via a SPAC. The first product is a social network that will be called “Truth Social”. The aim, according to Trump, is to “create a rival to the liberal media consortium and fight back against the big tech companies in Silicon Valley”.

“Truth Social” is supposed to launch as early as the first quarter of next year, the company says. After that comes a subscription video service with news, entertainment and podcasts, and in the future also a competitor to the tech companies’ cloud services. Grand plans, to put it mildly.

Even if the company does make it onto the stock market, its first big bet — “Truth Social” — will almost certainly fail. Social media platforms are easy to criticize but very hard to make work in practice.

There are several reasons for this:

Politicians on both sides agree the law needs to change. President Joe Biden has gone as far as saying it should be repealed. The way discussions on social networks are conducted is likely to become harder to maintain if the law is removed or amended. And even if it can be done, it can get expensive. Facebook reportedly has more than 15,000 content moderators – before any change in the law.

The dependence on third parties also means you have to live by their rules. The right-wing social network Parler ran into exactly that when AWS shut it down for breaching its terms of service. Trump’s new service will therefore be reliant on other services wanting to host it. Given the volume of controversies that Trump’s followers, and Trump himself, have generated, that will be challenging.

What’s left is the attention this generates. After the announcement of the SPAC listing and “Truth Social”, everyone is suddenly talking about Donald Trump again. It can be read as the opening act of an emerging election campaign. The launch shows that Trump is back in the media game. But a successful social network it will not be.

Facebook is changing its name — to escape its history

October 20, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 20th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

That Facebook is reportedly changing its name shows signs that one of its biggest strengths is becoming a weakness. It is also the starting gun for Mark Zuckerberg’s next big bet — the metaverse.

“People should know which companies make the products they use.”

That’s what Facebook’s marketing chief Antonio Lucio wrote in a blog post almost two years ago. At the time he was introducing a new logo intended to distinguish the company Facebook from the products it provides – Instagram, WhatsApp, virtual reality company Oculus, and the well-known blue app that goes by the name Facebook itself. Sharing a corporate name with one of the products can be confusing, but given the brand recognition it has also been an asset. Everyone knows Facebook.

The question is whether that asset is now turning into a liability. The tech site The Verge reports that CEO Mark Zuckerberg plans to rename the company. The blue app will keep its name, while the parent group on top of it gets a new name and houses Instagram and WhatsApp. If the rumors are correct, Facebook is doing the same thing Google did when it renamed its mothership Alphabet.

Zuckerberg, however, has different and more pressing reasons to change the name than his neighbor in Silicon Valley. Google wanted to expand and be associated with more than just search. Facebook, by contrast, wants to leave its current associations behind.

The first hint that Facebook as a brand had become problematic was the camera glasses the company released in September. They were called “Ray-Ban Stories”. The website mentions a partnership with Facebook, but nowhere on the product itself can you find the logo or the name. Perhaps it was deemed unlikely that people would want to walk around with a Facebook logo on their face, even a discreet one tucked onto a glasses frame.

There are two plausible reasons the name has become a burden for the social media giant.

The first is that Facebook has had a hard time shaking off the recurring scandals around election interference, harm to teenage girls, and privacy. Each controversy stains the brand a little, and creates associations that bleed into the rest of the product portfolio. If the blue Facebook app has handled something badly, it can spill over to Instagram because everything looks like one and the same company. A clearer separation could be preferable. The method has worked before. Scandals at YouTube have been kept reasonably separate from Google, even though they share the same parent.

The second reason is Zuckerberg’s plan ahead, his next big step for the company. He has told The Verge that “we will go from people primarily seeing us as a social media company to being a metaverse company”.

So what is the “metaverse”? It can be described, simply, as a new kind of internet, where in a game-like 3D environment you can shop, work, play and communicate with others. Facebook wants to help build that infrastructure – the underlying system on which this vision can become reality.

The bet is enormous, and broad. Facebook already has more than 10,000 employees working on hardware for augmented reality, expected to be a central piece of its metaverse project. Add to that the people working on virtual reality bets like Oculus and the virtual world Horizon Worlds.

If Zuckerberg pulls this off, he will have created a new digital world that runs in parallel with the one he steers day to day. In that context it is logical to leave the old one – with its positive and negative associations alike – behind. Zuckerberg’s metaverse is meant to be seen as something else entirely. And as a chance to start over – with new ambitions and a new communications plan.

The fight over Big Tech could create legislation havens

October 19, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 19th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The EU wants the European headquarters of tech companies to determine where they are regulated. But the proposal risks repeating the mistake of the tax havens — where individual countries now compete on legislation.

The nickname belongs to Denmark’s Margrethe Vestager. She is currently Executive Vice President of the European Commission, but previously held the post of Competition Commissioner. It was in that role that she fined Google more than €4 billion – about SEK 43 billion – in 2018 for breaches of competition law. All for abusing its strong position in the market for operating systems.

Vestager won that round, but in recent weeks the parties have been back in court. Google has appealed the ruling, and a spokesperson for the company told the news site Politico that “this case is supported neither by the facts nor by the law”. A verdict is expected sometime next year, though even that can be appealed one further instance.

The reason Google can keep challenging the legislation is that it is both unclear and fairly blunt. A major effort is now underway in the EU to clarify the law through two big initiatives – the Digital Services Act (DSA) and the Digital Markets Act (DMA). They are aimed at, for example, curbing monopoly formation and regulating tech companies’ use of data. The DSA and DMA are still being drafted and are not yet in force.

One big question is where the legislation should sit and how it should be enforced. The EU does not want to leave the laws in the hands of the United States, even though that’s where most of the tech companies come from. The reason is partly about power, partly about a different view on data and privacy on each side of the Atlantic.

The flaring debate around a global minimum tax also plays a role here. When 136 countries at the OECD agreed on 15 percent as a floor for corporate tax, the deal included a clause that specific “digital taxes” would be removed. That could threaten parts of the DSA and DMA.

The minimum tax, however, is still only a proposal, and the EU is pressing on with its own initiatives. In an interview with Reuters, Christel Schaldemose, who is leading the DSA effort in the European Parliament, said they want each EU country to regulate its own tech companies. That would mean the location of the European headquarters determines which legislation applies. For Apple, Google and Facebook that means Ireland, while Amazon would fall under Luxembourg law.

The principle sounds simple. But it also opens the door to a new version of a problem that already exists on the tax side.

The main reason tech companies’ headquarters sit where they do is, today, already driven by tax. Ireland is not an important market for any of the tech giants — what attracts them is a corporate tax of 12.5 percent and generous tax breaks for research and development. In Sweden, corporate tax is just over 20 percent, and in the United States 27 percent. The tech giants also become major employers and important civic actors wherever they land.

The idea that a country like Ireland would want to crack down on tech companies therefore looks unlikely. And were the legislation to land with them, it’s easy to imagine a more permissive stance. Tax havens, in other words, may end up with a new sibling – legislation havens. Whereas companies once chose a country for tax reasons, they may now choose one for its laws.

Putting legislation in the hands of each individual EU member state also risks creating internal competition between countries on these questions. That’s plausibly the opposite of the clarity Vestager and her colleagues are aiming for with the DSA and DMA. On top of that, you can question the ability of smaller countries to actually enforce the laws. There need to be resources to run legal proceedings at a high enough level.

Whichever country you look at, a reasonable guess is that the tech companies’ legal budgets are meaningfully larger than the state’s equivalent on the other side of the courtroom. Take Luxembourg. It has about 630,000 inhabitants. Amazon has 1.3 million employees.

If LinkedIn can’t operate in China — who can?

October 15, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 15th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

There used to be only one realistic way into China for a foreign company. Now even that may be closed. As LinkedIn dismantles its social network in the country, it could mark a new era for tech companies in China.

The accepted wisdom has long been that the only way to enter China as a foreign company is through partnerships. Local legislation and the relationship with the Chinese state simply require some form of Chinese co-ownership. But play those cards right and an enormous market opens up.

That was the pitch for LinkedIn too, when it launched in China in 2014. The Microsoft-owned social network had partnered with venture capital firms China Broadband Capital and a Chinese arm of Sequoia Capital for precisely this reason. Which makes it striking that LinkedIn has now announced it is shutting down the part of its service where users can post articles and updates. It looks like the relationship with the state was, after all, not enough to keep the operation going.

Earlier in the month, reports had already emerged that LinkedIn had begun removing content from journalists who cover China. A reporter at the news site Axios got a notice from LinkedIn saying that “your profile and public activity, such as your comments and the links that you share with your network, will not be visible in China”. Exactly which material was being referenced wasn’t specified, but the common thread was that the notice went to journalists who had been covering China — and who had, in the process, sometimes been critical of the country.

The theory that this is about the expression of inconvenient opinions is supported by the fact that LinkedIn is keeping some operations in the country, but through a newly launched app focused on job listings. The company itself is not banned from China – it’s only one specific part of the operation that can no longer be run there. LinkedIn’s own framing is that it has become a “significantly more challenging operating environment and greater compliance requirements in China”.

LinkedIn isn’t alone in this “challenging environment”. The entire Chinese tutoring industry was wiped out almost overnight after the state decided it was not appropriate for anyone to make money from it. This week the industry got a small reprieve, with those companies now allowed to assist with vocational training at least. The point is to fit in as a piece in the modern China that Xi Jinping wants to build. And those swings can come fast – even for the companies that are on the inside.

The picture being painted is a China that is closing in on itself. The intense pressure put on the domestic tech companies has drawn the world’s attention and pushed share prices down. When even established foreign companies – which followed the playbook – are now being forced to rethink their operations, that may add to the uncertainty for global investors.

If not even the world’s second most valuable tech company, Microsoft, can navigate the political landscape – what hope is there for everyone else?

Play to earn: gaming’s lawless new crypto frontier

October 11, 2021
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 11th, 2021. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

When crypto technology meets the gaming world, players turn into investors. A new trend has the potential to turn gaming on its head.

“When I started, I played almost four to five hours a day,” says John Ramos, a 22-year-old man from the Philippines.

It sounds like the kind of quote you’ve heard many times before from someone caught in a gaming addiction. But this is something else, and it ends differently than these stories usually do.

Ramos has turned gaming into a job. He has recently bought several houses with the winnings he has earned in the game “Axie Infinity” since he started last November. It’s part of a new phenomenon in the gaming and crypto worlds called “play to earn”.

Behind the game is the Vietnamese game studio Sky Mavis, recently valued at $3 billion – about SEK 26 billion – when American venture capital giant Andreessen Horowitz invested in them. This for a company only three years old. The growth has been fast – and is still accelerating. Revenue from in-game purchases inside Axie Infinity is projected to reach $1 billion in 2021, with 17 percent of that going to Sky Mavis.

The trend is in an early phase, but you can find it in Sweden too. Game developer Antler Interactive is working with blockchain company Chromaway on a game called “My Neighbor Alice”. It uses its own cryptocurrency, Alice, which launched publicly in March this year. Trading in Alice is already underway, but the game itself isn’t finished. It’s expected to launch sometime next spring.

Making money from playing computer games is nothing new in itself. But “play to earn” is different from e-sports and game streaming in that the game itself generates the revenue – not the viewers and sponsors around it. E-sports is closer to traditional sport in its business model. With play to earn, you play to collect virtual objects and cryptocurrency inside the game itself, but they can be traded on crypto exchanges outside it.

That may sound like a small distinction. But it turns the traditional business model of the gaming world upside down.

Normally, the revenue from a game flows directly to the studio that built it. Sometimes the money is shared with publishers who helped develop and market it. To simplify: the more people play, the more profitable the game becomes – regardless of the underlying business model.

With “play to earn”, you’re also playing games, but the difference is that the more people who join, the more valuable the things you own inside the game become. As a player, you benefit from the game’s success because the assets you’ve collected suddenly have more potential buyers. The most expensive Axie – a cartoon creature that looks like a cross between a cat and a fish – sold late last year for around $125,000, more than SEK 1 million.

The more players, the more people there are to trade with. From this perspective, it looks more like a cryptocurrency or a regular stock, where value is set by supply and demand. Drape this trade in a game, and you get a hybrid where players have a clear incentive to spread the game to others. They aren’t necessarily spreading it because it’s fun – they’re spreading it because they can profit from doing so.

This development is interesting and fast-growing, but it also carries an aftertaste of industries you might not want to be associated with. Recruiting new players to make your own investment more valuable looks a lot like MLM (multi-level marketing, where individuals sell directly to other individuals) and even has certain similarities to a pyramid scheme.

When you start playing computer games to make money, a lot of new questions appear. Is this entertainment or an investment activity? Does it look more like a casino than a board game? In an almost lawless frontier between gaming and crypto, we’ve only seen the beginning of this trend – and its problems.